The great unwind of the Fed’s balance sheet
For the first time since it began its quantitative easing in 2009, the US Federal Reserve (Fed) announced it would commence the gradual unwind of its US$4.5 trillion balance sheet sometime later in 2017. Should this plan proceed, higher borrowing costs for corporations and households will be the likely result and this warrants a degree of caution.
Chief Executive Officer of Montgomery Investment Management, David Buckland has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Tony Leahy
:
What does this statement mean ” the US Federal Reserve (Fed) announced it would commence the gradual unwind of its US$4.5 trillion balance sheet sometime later in 2017.” What is involved with this unwinding process and what does it affect?
David Buckland
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The US Budget Deficit or the Government Revenue less the Government Expenditure hit US$1.4 trillion in 2009, and has been slowly declining to sub US$500 billion per annum. To fund the deficit the Government issues bonds, and the Central Bank has been a significant buyer of those bonds, thus assisting with very low interest rates. The gradual unwind of the US Federal Reserve’s US$4.5 trillion balance sheet means they are likely to become a net seller of those previously acquired Government bonds, thus reducing the size of their balance sheet. It is possible interest rates on those longer term Government bonds increase as the Central Bank turns into a seller.